Investors can no longer rely on shares to rise in value, following the stock
market crashes of the past decade.

Investors looking to capital growth to boost their portfolio are in for a rude awakening, according to Fidelity, one of the world's biggest fund managers. It believes that we are entering the "age of income" – that income that will be the key to successful investing and bigger returns.

The authors of Fidelity's "Age of Income" report argue that, after two severe stock market corrections in less than a decade, the equity cult has "deflated" and the maturing "baby boomers" who are now moving into retirement want income-paying assets.

But herein lies a problem.

The traditional sources of reliable income no longer bear attractive fruit. What's more, as the number of sources of income have fallen, the demand for it has risen. An increase in life expectancy means that, in developed economies, people are living in retirement for almost as long as they are living while earning – which means they need to turn on the income tap.

But after more than three years of record low Bank Rate, cash alone does not provide adequate income for savers to live off.

This is forcing many investors to change tack, with many having little option but to step up the risk ladder by dabbling in equities and investing in some riskier corporate bonds.

Chris McNickle, global head of institutional business at Fidelity, said: "Low interest rates and bond yields are encouraging a search for yield that forces investors to look beyond government bonds towards assets with more attractive risk-reward characteristics."

How people generate income from their assets needs to change – a portfolio that produced an inflation-beating yield five years ago will not do the same today.

Take bonds, for instance. They have delivered exceptionally good returns over the past decade. But a five-year gilt is now offering around 2pc – compared with 6pc five years ago.

That's not all. Corporate bonds – the most popular sector of the past 10 months – are expensive, so investors are paying more for a lower yield.

But Rob Burgeman of Brewin Dolphin, the broker, said bonds still had an important part to play.

"What they add to a portfolio is ballast that reduces some of the volatility of equity markets. In the end, while the returns from bonds can seem more pedestrian, they are inherently a less volatile asset class than equities because of where they sit in the capital structure," he said.

High-yield bonds, for example, are yielding an average of 11pc, according to figures from Datastream – three percentage points more than five years ago.

Traditionally the staple for many British investors searching for income has been equity income funds – and here the outlook looks promising. Many of these funds suffered at the height of the credit crunch as companies cut or scrapped dividends, but balance sheets are now in better shape and dividends are at record highs.

The Principal White List, an impartial guide to UK equity income funds, said in its mid-year review that, when compared with other income-generating assets, dividend-paying equities looked very attractive.

"With gilts driven to record low yields following further purchasing by the Bank of England, an equity market yield in excess of 4pc is attractive to those investors who are able to accept capital volatility," said Chris Ganney, author of the White List.

British equities are also paying a higher yield now than before the credit crisis. As the bar chart shows, average UK equity yields are greater than five years ago, whereas corporate bonds, gilts and cash are all yielding less than in 2007. The UK is not the only equity market to be paying increasing yields. The 15-year average yield on European companies is 2.8pc – but now they are paying 4.3pc.

Emerging market equity yields are up to 2.7pc, compared with the historic average of 2.4pc. And even the United States – not previously a market known for its dividends – is yielding 2.1pc now, compared with 1.8pc in the past.

Richard Turnill, co-manager of the BlackRock Global Income fund, said: "At current levels, nominal bond yields are exceptionally low, which, given this week's surprise increase in inflation, means that they are delivering negative real yields.

"One of the key benefits of investing in equities is that high-quality companies, with competitive advantages, can increase prices in response to cost inflation, thereby passing through the effects of inflation to end users.

"Ultimately, while bond investors are receiving negative and falling yields, the dividend stream offered to equity investors not only keeps pace with inflation, but in many cases beats it. The end result of this is an income stream that is increasing in real terms."

Mr McNickle pointed out that investing for income also tended to be lower risk than a growth strategy. "Equity income strategies have the benefit of being more defensive than the broad market. The income offers a measure of protection to investors against capital losses. Moreover, the companies that pay consistent dividends are often higher-quality, defensive companies, with stable earnings streams," he said.

Property also provides opportunity for income growth, although, as Mick Gilligan of Killik pointed out, it is sensitive to economic weakness and is an illiquid asset – it can be difficult to sell if you need a quick exit.

But as a small part of a portfolio, commercial bricks and mortar can provide an income boost. According to Fidelity, European real estate is yielding around four percentage points more than German government bonds.

Fidelity stresses the importance of the right blend of assets to produce an income portfolio.

"The danger of targeting yield is that we end up with greater exposures to high-yield bonds and equities, which introduce higher volatility," it said. "Similarly, the danger of targeting low volatility is that we end up with a large exposure to investment-grade bonds and we sacrifice some yield.

"A more risk-aware approach is one that identifies a sensible trade-off between the competing objectives of managed volatility and a stable yield."

Mr Burgeman agreed. "The right mix of assets is very much dependent on the degree of risk and volatility that you are prepared, and can afford, to take," he said. "Investment is as much about getting this mix right as about the individual investments themselves and, by adopting a portfolio approach, one can reduce some of the risks, get a portfolio yield of around 3.5pc and preserve the real value of your capital over time."